Deductions From Federal Adjusted Gross Income
State Income Tax Refund
Enter the amount of any state or local income tax refund included on Line 10 of your federal return, Form 1040.
Interest From United States Obligations
Enter the amount of interest received from notes, bonds, and other obligations of the United States (such as U.S. savings bonds, treasury notes and bills, etc.) or United States possessions.
Taxable Portion of Social Security and Railroad Retirement Benefits
Social security and railroad retirement benefits are not subject to State income tax. Enter any Title 2 social security benefits received under the Social Security Act and any Tier 1 or Tier 2 railroad retirement benefits received under the Railroad Retirement Act that were included in federal adjusted gross income. Railroad Retirement Act benefits include railroad unemployment insurance benefits and railroad sickness benefits.
Retirement Benefits Received by Vested Government Retirees (Bailey Settlement)
As a result of the North Carolina Supreme Court’s decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local governments or by United States government retirees (including military). The exclusion applies to retirement benefits received from certain defined benefit plans, such as the North Carolina Teachers’ and State Employees’ Retirement System, the North Carolina Local Governmental Employees’ Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees’ Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989. The exclusion also applies to retirement benefits received from the State’s §401(k) and §457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989. The exclusion does not apply to local government §457 plans or to §403(b) annuity plans. Benefits from other State, local, and federal retirement plans may or may not be excluded depending on rulings in the Bailey case. The exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and their political subdivisions.
A retiree entitled to exclude retirement benefits from North Carolina income tax should claim a deduction on Line 43 for the amount of excludable retirement benefits included in federal adjusted gross income. Even if all your retirement is excludable under Bailey, you must still file a North Carolina return if you meet the minimum gross filing requirements on Page 4. Important: If you qualify for this deduction, you do not qualify for the deduction for retirement benefits of up to $4,000 for the same federal, state, and local government retirement benefits. A copy of Form 1099-R or W-2 received from the payer must be attached to the return to support the deduction.
Other Retirement Benefits
You may deduct a portion of other retirement benefits included in federal adjusted gross income. Retirement benefits are amounts paid by an employer to a former employee or to a beneficiary of a former employee under a written retirement plan established by the employer to provide payments to an employee or beneficiary after the employee ends employment with the employer where the right to receive the payments is based upon the employment relationship. For self-employed individuals, retirement benefits are amounts paid to an individual (or beneficiary) under a written retirement plan established by the individual to provide payments after self-employment ends.
Retirement benefits also include amounts received from an individual retirement account or from an individual retirement annuity (IRA) and long-term disability benefits received under the Disability Income Plan of North Carolina. Retirement benefits do not include short-term disability benefits from the Disability Income Plan of North Carolina or distributions paid to an employee from an employer’s retirement plan because of a change in the structure of a corporate employer.
Federal, State, and Local Government Retirement Benefits. Important: The following instructions apply to you if you received retirement benefits as a former employee of the State of North Carolina or any of its local governments or as a former employee of the federal government and you did not have five years of service with the government as of August 12, 1989, or if you received retirement benefits as a former employee of any other state or from a local government §457 plan. Otherwise, see the Line 43 instructions above. If you received retirement benefits from one or more federal, state, or local government retirement plans, you may deduct the amount included in federal adjusted gross income or $4,000, whichever is less. Married individuals filing a joint return where both received such retirement benefits may each deduct up to $4,000 for a potential deduction of $8,000.
Private Retirement Benefits. If you received retirement benefits from one or more private retirement plans other than federal, state, or local government retirement plans, you may deduct the amount included in federal adjusted gross income or $2,000, whichever is less. Married individuals filing a joint return where both received such retirement benefits may each deduct up to $2,000 for a potential deduction of $4,000.
The total retirement benefits deduction may not exceed $4,000 per taxpayer. For married couples filing a joint return where both spouses received retirement benefits, the deduction applies separately to each, so that the maximum deduction on a joint return is $8,000.
If you included retirement benefits in federal adjusted gross income, complete the Retirement Benefits Worksheet and enter the result on Form D-400, Line 44.
You may deduct up to $35,000 of any severance wages you received as a result of your permanent involuntary termination from employment through no fault of your own. The severance wages deducted as a result of the same termination may not exceed $35,000 for all taxable years in which the wages were received. “Stay on pay” does not qualify for the deduction.
Severance wages do not include payments that represent compensation for past or future services. Compensation for past or future services includes payment for accumulated sick leave, vacation time, other unused benefits, bonuses based on job performance, or payments in consideration of any agreement not to compete.
Adjustment for Bonus Depreciation Added Back in 2008, 2009, 2010, 2011, and 2012
North Carolina did not adopt the 50 percent bonus depreciation provisions in IRC section 168(k) for tax year 2008 or in IRC sections 168(k) or 168(n) for tax years 2009 and 2010. Similarly, North Carolina did not adopt the provisions of the Small Business Jobs Act of 2010 which extended the 50 percent bonus depreciation through 2011or the Tax Relief Act of 2010 which doubled and extended bonus depreciation from 50 percent to 100 percent for qualified property acquired and placed in service after September 8, 2010 and before January 1, 2012. The Tax Relief Act makes 50 percent bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013. Certain long-lived property and transportation property is eligible for 100 percent expensing if placed in service before January 1, 2013. Any amount added to federal taxable income or federal adjusted gross income on the 2008, 2009, 2010, 2011, and 2012 State returns may be deducted in five equal installments beginning with the 2009, 2010, 2011, 2012, and 2013 State returns, respectively. Therefore, enter 20 percent of the bonus depreciation added back on the 2008, 2009, 2010, 2011, and 2012 State returns.
Adjustment for Section 179 Expense Added Back in 2010, 2011, and 2012
North Carolina did not conform to the increased expense deduction or increased investment limit for section 179 property but rather maintained the expense deduction and investment limit allowed under the Internal Revenue Code as of May 1, 2010. Any amount added to federal taxable income on your 2010, 2011, and 2012 returns may be deducted in five equal installments beginning with the 2011, 2012, and 2013 State returns, respectively. Therefore, enter 20 percent of the section 179 expense deduction added back on your 2010, 2011, and 2012 State returns.
Contributions to NC College Savings Program
You may deduct up to $2,500 ($5,000 on a joint return) for contributions made during the taxable year to an account in the Parental Savings Trust Fund of the State Education Assistance Authority (North Carolina’s National College Savings Program - NC 529 Plan), regardless of your income level.
Adjustment for Absorbed Non-ESB NOL Added Back in 2003, 2004, 2005, and 2006
North Carolina did not adopt the federal five year net operating loss (NOL) carry back provision authorized by the Worker, Homeownership, and Business Assistance Act of 2009. Relief was to be provided in future years for the portion of the individual’s 2008 and 2009 NOL that was not attributable to an Eligible Small Business. An addition to federal taxable income was required for the amount of any 2008 and 2009 NOL claimed under WHBAA beyond the standard two year period. If you made the required addition, you may deduct one-third of the 2008 NOL absorbed on your 2003, 2004, and 2005 federal returns and one-third of the 2009 NOL absorbed on your 2004, 2005, and 2006 federal returns on your 2011, 2012, and 2013 State returns. For additional information see our website www.dornc.com.
Adjustment for Net Business Income That is Not Considered Passive Income
Certain taxpayers are allowed a deduction of up to $50,000 of net business income included in federal adjusted gross income that is not considered passive under the Internal Revenue Code. In the case of a married couple filing a joint return where both spouses report a net business income, the maximum dollar amount applies separately to each spouse’s net business income included in federal adjusted gross income, not to exceed a total of $100,000 (maximum $50,000 each). For additional information please refer to our website http://www.dornc.com/practitioner/individual/directives/pd-12-2.pdf. or frequently asked questions http://www.dornc.com/taxes/individual/netbusdeduction_faq.html.
Other Deductions From Federal Adjusted Gross Income
• You may deduct $250 if you were an unpaid volunteer firefighter or an unpaid volunteer rescue squad worker who attended at least 36 hours of fire department drills and meetings or 36 hours of rescue squad training and meetings during 2013. An individual may not claim a deduction as both a volunteer firefighter and a volunteer rescue squad worker. In the case of a married couple filing a joint return, each spouse may qualify separately for the deduction.
• If you itemized your deductions and claimed the mortgage interest tax credit on your federal return because you participated in the mortgage credit certificate (MCC) program, you may deduct the amount shown on Line 3 of Federal Form 8396.
• A $250 educator expense deduction will be allowed on the North Carolina return for 2013 to the extent a deduction has not been claimed in determining federal adjusted gross income. This deduction is allowed only to the extent the expense has not been claimed under section162 of the Internal Revenue Code for the taxable year. In the case of a married couple filing a joint return where both spouses are eligible educators, the maximum amount is $500.
For tax year 2013, if you elected to itemize deductions on your North Carolina return, you may deduct the amount of the charitable distributions from an IRA that would have been allowed as a charitable deduction under section 170 of the Code had you not elected to take the income exclusion under 408(d)(8) of the Code.
Note: This deduction is not subject to the charitable contributions limitation and carryover provisions under section 170 of the Code, but it is subject to the overall limitation on itemized deductions under section 68 of the Code.
Important: A taxpayer who elected to claim the American Opportunity, Hope, or Lifetime Learning credit under section 25A of the Code in lieu of the deduction for qualified tuition and expenses under section 222 of the Code is no longer allowed a deduction from federal adjusted gross income of the tuition and fees deduction forfeited on the federal return.